Tag: #publicsectorinvestment

Chief Secretary brands Treasury ‘new radicals in government’

3 August 2020: Chief Secretary to the Treasury Steve Barclay delivered his first speech last week, providing fresh detail on the plan for the Spending Review.

Steve Barclay’s first speech as Chief Secretary, delivered to thinktank Onward on Tuesday 28 July 2020, set out how he believes Treasury can be an accelerator of change in government.

He sees the Spending Review as a significant moment in the lifecycle of any government, but with the current review being conducted against the backdrop of the most challenging peacetime economic circumstances in living memory.

Despite that, the Government believes the recovery from this pandemic can be a moment for national renewal, with the Spending Review acting as the mechanism to deliver the Prime Minister’s ambition to ‘level up’ the country.

As a constituency MP, Barclay said he has run up against a system that is slow and siloed. By way of an example, he asked why there is a seven-year gap between funding being agreed for a road scheme and the first digger arriving? Or why it takes a decade to decide to produce a full business case on whether to re-open eight miles of railway track?

The lack of upfront clarity on outcomes, the slow speed of delivery and the variable quality of data within government are all areas the Spending Review provides an opportunity to challenge.

The Chief Secretary stressed that to ‘level up’ the country properly, the Government needs to ensure that Treasury decision-making better reflects the UK’s economic geography, with more balanced judgments taking into consideration the transformative potential of investment to drive localised growth.

He drew on the speed of change during the pandemic, with the furlough scheme taking just one month from being announced to being opened for applications when normally such schemes take months – years even – to deliver.

He asked if the wheels of government can be made to spin this fast in a crisis, with all the added pressures of lockdown, why can’t it happen routinely?

Time to level up

The Chief Secretary stated that the actions being taken to support businesses and jobs during the pandemic are the right thing to do, even though it comes at a cost. The cost of inaction would be far greater, he claimed.

Even though the Prime Minister has made it clear that austerity is not the answer to navigating a much-changed economic landscape, departments will have to make tough choices in the months ahead.

The commitment to reviewing the Green Book investment manual was reiterated with changes planned to allow room for more balanced judgments on investments to reduce inequality and drive localised growth.

During the speech, Barclay listed several priorities for government in the Spending Review:

  • accelerating the UK’s economic recovery;
  • levelling-up opportunity across the country;
  • improving public services; and
  • making the UK a scientific superpower.

Outcomes, speed and data

To achieve these objectives, the Chief Secretary focused on three key approaches: outcomes, speed and data.

On outcomes, the Spending Review would try to tie expenditure and performance more closely together, with Treasury having clearer sight of both intended outcomes and subsequent evaluation of their delivery. 

For some of the most complex policy challenges, this will involve breaking the silos between departments, and pilot projects are currently being used to test innovative ways of bringing the public sector together.

On speed, Barclay noted that this is a ‘hallmark of the digital era’. Programmes need to start with robust goals and the temptation to repeatedly change plans has to be resisted if the UK is to bring down capital costs that are typically between 10% and 30% higher than in other European countries. A new Infrastructure Delivery Task Force (known as Project Speed) will be established to cut down the time it takes to develop, design and deliver vital projects.

This will involve more standardisation and modularisation between projects, for example in speeding housing construction. The Spending Review will seek to accelerate the adoption of Modern Methods of Construction and explicitly link funding decisions to schemes that priorities it.

On data, the Chief Secretary believes that government is behind the curve when it comes to obtaining, analysing, and enabling access to open data. It remains the case that decisions still rely heavily on spreadsheets from departments rather than data directly sourced in real time. Work has already begun to incentivise departments and arms-length bodies to supply higher quality standardised data and to support the Treasury to better interrogate this data.

Building this will involve sorting out the data architecture as well as the data sets, and the Spending Review will focus on addressing legacy IT and investing in the data infrastructure needed to become a “truly digital government”.

The new radicals

Barclay concluded with stressing the importance of taking risks, setting ambitious goals and experimenting with ways of delivery, even if failure is a possibility. He wants to move beyond a simple yes/no approach to public spending and instead bring together people, ideas and best practice from inside and outside government.

He concluded: “This is an opportunity for the Treasury to capture the ‘can do’ attitude shown by civil servants during the COVID pandemic and make it permanent. To be the new radicals, leading change across government.

“Done well, we can move on from an era of spreadsheets. We can create a smarter and faster culture in Whitehall. And we can ensure that Britain does indeed bounce back from this crisis stronger and better than before.”

Speech by Steve Barclay MP, Chief Secretary to the Treasury, on 28 July 2020.

This article was originally published by ICAEW.

Spending Review suspension sensible, but avoid more delays

2 April 2020: ICAEW has called the delay to the UK Government’s 2020 Spending Review a ‘sensible move’ in the current climate, but warned that any further delays pose a major risk to infrastructure projects and economic recovery.

The 2020 Spending Review, scheduled to be completed by July this year, has been delayed to enable the government to remain focused on responding to the ongoing coronavirus outbreak. It is likely that the 2020 Spending Review will now be moved to November to coincide with the Autumn Budget, adding a further delay of at least four months to the process.
 
The last three-year Spending Review was in 2015, covering the financial years 2016-17, 2017-18 and 2018-19. The anticipated 2018 Spending Review never took place and departmental budgets were instead ‘rolled over’ into 2019-20, while the Spending Review in 2019 was also cancelled and replaced by an interim Spending Round that set out current spending by departments for one financial year (2020-21) and capital investment plans for two financial years (2020-21 and 2021-22).
 
Based on the overall spending envelope set out in the Spring Budget 2020, the Spending Review this year is expected to set out detailed financial budgets for each government department for a three-year period (from 2021-22 to 2023-24) and four years for capital investment (to 2024-25), enabling public bodies to plan ahead and get the best value for money for the taxpayer.
 
Alison Ring, Director, Public Sector for ICAEW said: “The latest delay is completely understandable given the huge ramifications for the economy and the public finances of the coronavirus emergency. It makes sense for the Chancellor and the Treasury to redeploy resources to deal with the coronavirus now and to re-evaluate spending plans later when there is a clearer view on the financial impact.
 
One concern is the risk this further delay poses to infrastructure projects, given how important they will be to a successful economic recovery. The need to plan and design infrastructure well in advance means that delays in authorising funding could have a significant knock-on effect to when projects are eventually delivered, and to the boost they can give to the economy. 
 
The Chancellor should give some thought to providing assurances to departments about capital funding in 2021-22 and 2022-23 so that they have sufficient certainty to green-light projects sooner rather than later.
 
The Chancellor should also consider the Government’s approach to Spending Reviews. There are many arguments in favour of holding five-year Spending Reviews every three years, rather than three-year Spending Reviews every five years.”
 
For more information:

This article was originally published by ICAEW.

Spring Budget 2020: Hey big spender, spend a little infrastructure with me

12 March 2020: Rishi Sunak’s first Budget as Chancellor of the Exchequer provided a sharp change in direction for the public finances – something that will please and surprise many, according to ICAEW’s Public Sector team.

Spring Budget 2020 combined a short-term fiscal stimulus to fight the coronavirus with higher spending on public services and new infrastructure investment to increase borrowing significantly. Fortunately, ultra-low interest rates will keep financing costs down on the more than £330bn in borrowing planned to finance these plans (not including short-term fiscal stimulus measures), with public sector net debt expected to exceed £2.0tn by 2025.

This Budget is particularly important as it sets the spending envelope for the three-year Spending Review expected to be published later this year. With a higher base for spending following the Spending Round 2019 announced by the previous Chancellor in October, this signals an end to the austerity policies of recent administrations. 

Key headlines for 2020-21:

  • Fiscal deficit up from £40bn to £55bn (2.4% of GDP), before coronavirus measures.
  • No significant tax changes beyond corporation tax remaining at 19%.
  • £14bn extra current spending and £5bn extra investment before coronavirus measures.
  • £12bn in tax and spending measures to respond to the coronavirus.
  • Gross financing requirement of £162bn, including £98bn to cover debt repayments.
  • No reflection of uncertain adverse economic effect of the coronavirus on tax revenues.

Key headlines for the four subsequent years to 2024-25:

  • Fiscal deficit of £62bn (2.5% of GDP) on average over the subsequent four years.
  • Tax policy measures to generate an additional £7bn per year.
  • Extra current spending of £27bn a year and extra investment of £19bn a year.
  • Gross financing requirement of £595bn (£149bn a year) including £315bn to cover repayments.
  • Significant economic uncertainty with coronavirus, global economic conditions and changes in UK trading relationships with the EU and other countries.

The existing plans already incorporated a significant ramp-up in infrastructure and other investment spending with public sector net investment forecast to increase from 2.2% of GDP in 2019-20 to 3.0% by 2022-23. The challenge for the Government will be to deliver and ‘get things done’, especially as capital investment by government departments is expected to increase by 25% in 2020-21 and by a further 35% over the subsequent four years. Will there be sufficient construction capacity and project management expertise to deliver such a rapid expansion and still deliver value for money for taxpayers?

The Budget also contained some important developments in the framework for the public finances, with a specific commitment to review the investment criteria in the Government’s ‘Green Book’ to ensure regions outside London and the South East benefit from the additional infrastructure spend proposed in the Budget. The focus on looking at the effect on investments on the public balance sheet was also welcome with new approaches planned for how to appraise public spending.

One surprise in the Budget announcement was that the OBR did not revise the economic forecasts down as much as had been expected. This was partly because of the economic benefits of higher public spending and investment, but also reflected an improved outlook for productivity. The benefit of this for the Chancellor was that he was able to announce additional current spending on public services, while still remaining within the fiscal rules set out in the Conservative party manifesto.

Unfortunately, the scale of the impact of the coronavirus on the economy is still unclear and so the forecasts for tax revenues may need to be revised downwards, potentially significantly, in the Autumn Budget later this year.

Commenting on Spring Budget 2020, Alison Ring, Director, Public Sector, at ICAEW said: “The Chancellor has announced a major loosening of the taps on spending and investment in his first Budget, with a combination of a short-term fiscal stimulus to fight the coronavirus, higher spending on public services, and a major programme of new infrastructure investment.

Those wondering where all the funding for this planned spending will come from may be surprised to discover that the Chancellor has not followed the custom of post-general election tax rises, but instead has decided to take advantage of ultra-low interest rates to borrow more than £330bn over the next five years. Public sector net debt is expected to exceed £2.0tn by 2025, although the Government hopes that this will then be falling as a ratio to the size of the economy.

Nevertheless, it is a Budget that many will be pleased with, even if a little surprising coming from the traditional champions of small government.”

This article was originally published by ICAEW.

ICAEW chart of the week: Regional capex

Chart: Difference from average identifiable public sector Capex per per year of £967. See table at end of post.

The #icaewchartoftheweek this week is on the subject of public sector capital expenditure across the UK in the light of speculation that the Spring Budget in March will feature a significant boost to capital spending in the North of England.

We thought it might be interesting to look at the most recent data; albeit the usual caveats apply to the numbers given the lack of formal systems in government to fully track expenditure by region and the differences between capital expenditure in the fiscal numbers (shown in the chart) and the capital expenditure reported in the (as yet unpublished) Whole of Government Accounts for 2018-19.

According to the ONS, there was £64.2bn in capital expenditure that can be identified by nation and region of the UK, an average of £967 for the 66.4m people living in the UK in 2018-19.

It is perhaps not surprising that there is more capital spending in London than the per capita average given that the millions of commuters and visitors that add to the 8.9m local population every day. However, the scale of the difference is substantial with £13bn invested in 2018-19, an average of £1,456 per person – £489 more than the UK average.

Of course, variations in capital expenditure are to be expected across a country of the size of the UK given the different natures and needs of each region and nation. For example, Scotland’s much higher level of per capita public capital expenditure (£7.2bn / 5.4m people = £1,325 per person) needs to be seen in the context that it comprises a third of the land area of the entire UK, but only has 8% of the population.

The region that incurs the least capital expenditure on a per capita basis is the East Midlands, where £3.0bn was spent in 2018-19, an average of £621 per person (£346 less than the average) for each of the 4.8m people living there. This is followed by Yorkshire and The Humber (£694 per person), the South West (£723) and the West Midlands (£799).

Most of the other regions are close to the average, including (perhaps surprisingly given some of the headlines), the North East and the North West.

One question that does come to mind – if Government’s intention is to rebalance regional inequalities by investing more in the ‘Northern Powerhouse’ and the ‘Midlands Engine’, will it have anything to spare for the ‘Great South West’ too?

2018-19
Capex
Population		Per
capita		Difference
from average
North East£2.4bn2.7m£906-£61
North West£7.0bn7.3m£955-£12
Yorkshire and The Humber£3.8bn5.5m£694-£273
East Midlands£3.0bn4.8m£621-£346
West Midlands£4.7bn5.9m£799-£168
East of England£5.7bn6.2m£924-£43
London£13.0bn8.9m£1,456+£489
South East£8.6bn9.1m£945-£22
South West£4.0bn5.6m£723-£244
Wales£3.0bn3.1m£956-£11
Scotland£7.2bn5.4m£1,325+£358
Northern Ireland£1.8bn1.9m£949-£18
United Kingdom£64.2bn66.4m£967–

Source: ONS, Country and regional public sector finances 2018-19: identifiable capital expenditure.

ICAEW chart of the week: Public sector capital expenditure

Chart: Capex (real-terms) £61.5bn (3.5% of GDP) in 2009-10, to £64.1bn in 2011-12, down to £49.2bn (2.6%) in 2013-14, up to £60.0bn (2.9%) in 2017-18.

With apologies for the delay because of being away, this week’s #ICAEWchartoftheweek is on public sector capital expenditure (capex), something that all the political parties in the #GE2019 have promised to increase – in some cases by very significant amounts! 

As part of ICAEW’s It’s More Than A Vote campaign, ICAEW will be analysing the political party manifestos over the next few weeks, including the potential implications for the public finances.

One area that all the major parties appear to agree on is the need to increase investment in infrastructure and other assets, which is why we thought we would look at the last nine years of capital expenditure reported in the Whole of Government Accounts (WGA), prepared under International Financial Reporting Standards. This differs from public sector investment in the National Accounts, with the latter including capital grants and other transactions that do not result in the creation of publicly-owned fixed assets.

As the chart illustrates, capital expenditure in 2017-18 of £60.0bn was lower than the £64.1bn incurred in 2011-12 after adjusting for inflation and to include Network Rail, the government owned railway infrastructure company prior to 2014-15 when it was incorporated into the WGA). As a proportion of the economy, capex in 2017-18 was 2.9% of GDP, a smaller ratio than the 3.5% calculated for 2011-12.

Only around £16bn (0.8% of GDP) of the amount spent in 2017-18 went into infrastructure assets (principally transport infrastructure such as roads and railways), with in the order of £24bn (1.2%) going into land & buildings, including hospitals and schools. Approximately £9bn (0.4%) was spent on military equipment, with the balance of £11bn (0.5%) invested in other public sector assets, ranging from tangible fixed assets such as plant & equipment, IT hardware, vehicles and furniture & fittings, as well as intangible fixed assets such as software.

Capex comprises a relatively small proportion of total expenditures (capital and non-capital) of £1.0tn reported in the WGA for 2017-18. As a consequence, even relatively small incremental amounts will constitute proportionately large increases in capital budgets in the next few years.

Whether these plans will be deliverable is another question, given that traditionally the government has struggled to spend all its capital budgets, not to mention the difficulties there will be in finding all the workers necessary for a major expansion in construction activity.

It’s More Than A Vote

ICAEW chart of the week: A rush of capital spending in March

Our #ICAEWchartoftheweek this time is on the subject of public sector net investment. This is the government’s preferred measure of capital spending, including much needed investment in the UK’s economic and social infrastructure.

Over the years, the process for delivering capital expenditure in the public sector in the UK has had a pretty bad reputation. 

The anecdote goes that the first quarter is spent arguing about budgets, in the second everyone goes on holiday, and it is only in the third quarter that programmes finally get up and running, before everything stops for the Christmas break. The final quarter is then a mad rush to spend the remaining budget before the end of the financial year.

Unfortunately, there does appear to be some support for this conjecture when we take a look at the actual numbers.

According to the provisional financial results for the year released last week, around 41% of public sector net investment in 2018-19 was incurred in the last quarter. £8.2bn or 19% was reported in the last month alone!

Brexit has been an added complication in this particular financial year, with the government’s no-deal preparations in the run up to the end of March involving additional capital spending. Despite this, March was the peak month last year, as it has been over the years.

This is a stubbornly consistent feature of the public finances in the UK, even after numerous attempts within government to improve capital budgeting and delivery processes. For example, departments are now able to carry over some of their capital budgets to future years, which in theory should reduce the incentive to spend every last penny of their allocation in-year. In practice, a great deal of activity seems to take place in March, while April and May appear to be much quieter.

Of course, it is possible that our concerns about the quality of government’s investment delivery process are not fully justified. There could after all be some very good reasons as to why the winter months are the best time for carrying out public capital works!